Distinct Eras in the History of U.S. Debt Monetization

Abstract

Here I review the history of debt monetization by the Federal Reserve, as well as the relationship between debt monetization and inflation. While it is commonly held that inflation follows from debt monetization, that has not been the case in the U.S., at least not since the Korean War. From the early 1950s through 2007 debt monetization has been modest and steady, while inflation has been highly variable. With the recent financial crisis, debt monetization entered a new era. Since 2008 the magnitude and composition of debt monetization has no precedent. Also unprecedented is the Federal Reserve’s ability to suppress inflation despite extensive debt monetization, at least through 2015. Overall, since the creation of the Federal Reserve, the United States has experienced substantial inflation both with and (more commonly) without debt monetization. It remains to be seen if the United States can experience substantial debt monetization without inflation.